Multi-dimensional interjurisdictional competition and coordination

The present dissertation aims to extend classical tax competition to a more general
framework in which jurisdictions compete in both taxes and non-tax instruments. In
this context, issues related to dynamic competition and tax coordination are investi-
gated.
Dynamic aspects of multi-dimensional competition. Under dynamic competition, firms
choose their location dynamically in each period to maximize their respective profits.
We develop a dynamic relocation rule of firms based on the home attachment prin-
ciple. Applying this rule, dynamic competition in taxes and public services among
unequally sized jurisdictions is investigated. We account for the widely recognized
characteristic that small states are more flexible in their decision-making than larger
economies. However, small countries may suffer from limited institutional capacity in
the provision of public services. Consequently, small and large countries behave asym-
metrically when they compete for internationally mobile capital. This heterogeneity is
analyzed within a differential game framework. We demonstrate that in case of high
capital mobility small economies may collapse economically if public services are inef-
ficiently provided. When capital mobility is very low, a small state’s economy always
expands despite its limited institutional capacity.
Tax coordination aspects. When jurisdictions compete in taxes and infrastructure, the
desirability of tax coordination is analyzed. The timing of the game is considered in
two different ways, simultaneous and sequential games. Two tax coordination devices
(a common tax rate and a minimum tax rate) are considered. We demonstrate that tax
coordination does not necessarily generate the welfare effects often observed in pure
tax competition literature. The reason is that the decision to coordinate on tax rate in-
duces a carry-over effect on infrastructure expenditures. Moreover, we highlight that
tax coordination is more likely to be detrimental when countries can compete simulta-
neously in taxes and infrastructure, rather than sequentially.Then, we investigate whether partial tax coordination benefits the tax union (the in-
siders) and/or the outsiders since tax coordination can be decided among a subset of
countries that forms a tax union. The member states of the union coordinate tax poli-
cies but still compete in infrastructure provision. In addition, the union as a whole
competes in taxes and infrastructure with the rest of the world. We demonstrate that
partial tax coordination can harm both union members and non-union members. This
contrasts with the classical view that partial tax coordination is Pareto improving.
Size effect on social welfare. Finally, we analyze how social welfare is impacted by in-
creasing the size asymmetry of countries when they compete in taxes and infrastruc-
ture. It appears that increasing size asymmetry does not necessarily exacerbate the
inefficiency of tax competition. More precisely, if the degree of international openness
is low (high), social welfare decreases (increases) with size asymmetry.